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What Does Billionaire Mario Gabelli's Company See in J.C. Penney?

By Selena Maranjian – Feb 12, 2014 at 2:23PM

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Is J.C. Penney too cheap to resist, or too troubled to buy?

The latest 13F season is commencing, when many money managers issue required reports on their holdings. It can be worthwhile to pay attention, as you might get an investment idea or two by seeing what some major investors have been buying and selling.

For example, consider GAMCO Investors (GBL -2.50%), the diversified asset manager and financial services company headed by well-known value investor Mario Gabelli. According to its recently released 13F statement, the company upped its shares of beleaguered department store chain J.C. Penney (JCPN.Q) by 59%.

The $8.2 million position is far from GAMCO's biggest, but it's curious that more shares were added at all. After all, nearly 30% of J.C. Penney's float has been shorted. And a look at its stock price history is alarming, as well: It's down about 71% over the past year and down an average of 13.4% annually over the past decade.

What's the problem?
So what's going on, you ask? Well, the retailer has been struggling mightily during the past few years. While some had held out the hope that an activist investor might push for meaningful changes, or that some entity would buy J.C. Penney, those hopes were dashed when the company instituted a poison pill strategy, to prevent anyone from buying too many shares and wielding too much power.

The company's missteps, or apparent blunders, have been legion. After the departure of CEO Mike Ullman, the company hired former Apple executive Ron Johnson – the guy behind Apple's successful Apple stores – only to replace him with Ullman again. Johnson had discontinued discounting and planned major renovations, and he left the company with excess inventory that it has been burning off -- in large part via heavy discounting. J.C. Penney has been burning through a lot of cash, too, with some wondering whether it will end up seeking bankruptcy protection in the next few years.

J.C. Penney has also been selling off some non-core assets, and shuttering some underperforming stores. Great companies tend to have strong competitive advantages, but J.C. Penney doesn't fit that bill. Its last sales update left questions unanswered, such as how December and January performance looked.

What's the solution?
It doesn't look good for J.C. Penney, but the company isn't necessarily doomed, either. Filing for bankruptcy protection may actually help, giving the company time and space to restructure itself. (It won't help shareholders, though, as their shares would likely end up worth nothing or very little.)

The company can improve its health by cutting costs, but cost-cutting isn't a great long-term driver of growth. The top line needs to grow. Some exciting partnerships could help, such as with high-profile designers. A sound strategy, and dedication to it, is what J.C. Penney needs.

What to do
While GAMCO is upping its modest stake in J.C. Penney, smaller investors might want to consider other retailers instead. Sears Holding (SHLDQ) is another beleaguered discount chain with revenue steadily dropping in recent years and net income in the red. It's cutting lots of jobs, too, and carries a lot of debt and pension obligations. Still, bulls will point out its extensive assets, including more than $8 billion worth of real estate.

Macy's (M -0.70%), another J.C. Penney competitor, is doing better, growing its top and bottom line and gaining market share while closing some stores and opening others. It offers a solid dividend yield of 1.9% and has been growing its dividend aggressively since slashing it in 2009.

Selena Maranjianwhom you can follow on Twitter, owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

J.C. Penney Stock Quote
J.C. Penney
Macy's Stock Quote
$22.53 (-0.70%) $0.16
Sears Holdings Stock Quote
Sears Holdings
Gamco Investors Stock Quote
Gamco Investors
$15.60 (-2.50%) $0.40

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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